Pros and Cons of a term deposit

Considering a term deposit for your money? While these accounts can provide stability with a fixed interest rate, they also have some limitations. To understand term deposits and see if they fit your needs, it's important to have the complete picture of advantages and disadvantages. 

So below, we’ve compiled a list of pros and cons to help you get started.

What are term deposits?

A term deposit is a savings option where you commit to keeping your money locked up for a specified time in return for a guaranteed interest rate, with terms varying from a few months to several years.

Term deposits provide several key benefits, making them a great option for savers who don’t need immediate access to cash.

Some benefits to consider include: 

• Interest rate certainty: When you lock in a rate, you know exactly how much your savings will grow, regardless of any market fluctuations. 
• Low maintenance: After making your initial deposit, there's nothing more you need to do until the term ends. This "set and forget" approach can be appealing if you prefer a hands-off way of saving.
• No service or startup fees: One of the best aspects of a term deposit is that it remains entirely fee-free as long as you don’t make an early withdrawal.
• Protection from market declines: With a fixed interest rate, your savings will continue to earn the same level of interest, even if market interest rates drop significantly.
• Control over impulse spending: If you tend to spend impulsively, a term deposit can help. Early withdrawals come with hefty penalties, encouraging better spending habits by making it less tempting to access your funds prematurely. 

Although fixed interest rates and limited accessibility offer certain advantages with term deposits, there are some downsides.

• Your money isn’t accessible. When you lock money in a term deposit, it usually remains inaccessible until the end of the term. Withdrawing funds early often results in penalties, lower interest rates, and often requires thinking ahead of time.
• No extra deposits. Once your deposit is set up, you cannot add to it, which means you miss the chance to further grow your savings during the term. However, you can add more when rolling over at the end of your term.
• Less flexibility. A term deposit is low risk – but the flip side is that it’s not a very flexible savings option. Other products with comparable rates, such as high interest savings accounts, offer much more in terms of flexible features and options.
• No bonus interest. Some savings accounts offer introductory or bonus interest rates, allowing you to earn a higher rate based on specific conditions. Term deposits usually do not have this feature, although some may provide loyalty bonuses.
• Rollover terms are often less competitive. If you forget to make plans for your money after your term deposit matures, it could roll over automatically into another term at a lower interest rate than average.
• Won’t benefit from rises in the market. If interest rates rise significantly during your term, you're locked into your lower rate and can't take advantage of better offers without incurring penalties.

Term deposits are widely regarded as a low-risk option for saving money. When you put your money in one, you receive a guaranteed interest rate for the duration of your chosen term. Additionally, in Australia, the government guarantees deposits of up to $250,000 per person at each Authorised Deposit-taking Institution (ADI). This means that even in the unlikely event that your bank encounters financial difficulties, your funds are protected up to this limit.

If you have more than $250,000 to save, consider spreading out your savings by spreading the amount across different banks to ensure that each deposit remains within the guaranteed amount for each institution.

That all depends on your savings style and needs, but a term deposit might be worth it if you are looking for:

• A safe, cash only investment. A term deposit is free of the risks that come with investing strategies like share trading.
• An easy way to start saving. Low maintenance and safe, a term deposit is a great way for novice savers to start out.
• Somewhere to stash a lump sum of money you don’t need soon. Got a Christmas bonus or maybe an inheritance? If it’s not part of your day-to-day budget, a term deposit might be the perfect place to stash it away.
• A strategy to meet and set future goals. Are you saving to buy a car in three months, or for a deposit on a home loan in two years? By putting your nest egg away in a term deposit, you’ll avoid the temptation of spending it before you reach your goal.
• A long term solution. Term deposit interest rates change all the time. If you’re looking for a long term solution that can ride the ups and downs of the market for years to come, a lengthier term deposit could be it.

The choice between term deposits and savings accounts depends on your personal needs and saving style. 

Term deposits offer more certainty regarding interest rates, but they lack flexibility. Early withdrawals typically incur a fee and often require 31 days' notice, so term deposits are ideal if you have a solid budget and a separate emergency fund in place.

On the other hand, savings accounts have variable interest rates, which can benefit you during rate hikes but may also be affected during cuts. They provide easier access to your funds, which might be preferable if you need more flexibility.

Ultimately, your decision should consider your budget, existing emergency savings, and need for flexibility when deciding between these two account options.

Find a term deposit

If all the advantages to having a term deposit have convinced you it’s the savings strategy for you, then here’s how to find the best offer:

First, head over to our term deposit comparison page to find the best offers from across the market.

Next, narrow it down with our term deposit search tool, which will show you results applicable to your deposit amount and desired term.